Heterogeneous effects of oil structure and oil shocks on stock prices in different regimes: Evidence from oil-exporting and oil-importing countries

Abstract

This paper examines whether or not the oil structure of economies, the source of oil shocks, and regime changes affect stock price responses. After dividing the entire period into two regimes (bull and bear market) and considering three different oil shocks: global oil price, global oil demand, and global oil supply, we attempted to select countries that are considered developed economies while demonstrating differences and similarities in their oil structures. To this end, we compare the effects of oil shocks on the stock prices of Norway and Canada, two oil-exporting countries, to China and Japan, two oil-importing countries, using the Threshold Structural Vector Autoregression (TSVAR) analysis for the period 1990:1–2020:4. The results indicate that the structure of the oil and the source of the oil shocks have a significant effect on the responses. In this regard, the responses of oil-exporting countries are strikingly similar to one another and dissimilar to those of the two oil-importing countries. All of the oil shocks considered thus far have had a short-term effect but have been neutral in the medium and long term (except for oil demand shocks in the bull market). Additionally, the stock market's responses to oil shocks have been regime-dependent, with most responses being more sharply in a bear market than in a bull market. According to the findings, there is a strong link between the stock market, the source and type of oil shocks (positive or negative), economics' oil structures, and regime changes, which may influence policymakers' response to various oil shocks in different stock market conditions.